This article provides an overview of the treatment of VAT transactions in the UAE. Business transactions subject to VAT are classified into two primary categories:
Sales Transactions:
| Quotations | Sales Orders | Delivery Notes | Invoices | Scheduled Invoices | Debit Notes |
Purchasing Transactions:
|
|
|
|
|
|
|
VAT in Sales Transactions
With respect to sales transactions, VAT responsibilities are determined by the customer’s location and whether they are registered for VAT. The following examples illustrate how VAT works in various scenarios.
-
Domestic Sales within the UAE
The tax treatment concerning VAT when goods and services are sold to customers within the borders of the UAE is as follows:
| Consumer Category | Tax Treatment |
| VAT Registered | Standard Rate (5%), Zero Rate, Exempt, Out of Scope |
| Non-VAT Registered | Standard Rate (5%), Zero Rate, Exempt, Out of Scope |
VAT is typically charged at a rate of 5% for business-to-business sales with a VAT-registered entity in the UAE. However, some transactions may be subject to conditions where they are not rated, exempted, or are deemed out of classification.
-
Sales to GCC Customers
The VAT treatment of goods or service sales to GCC member state clients depends on the registration status of those clients for VAT purposes:
| Consumer Category | Region of Service | Tax Treatment |
| VAT Registered(GCC) | UAE | Standard Rate (5%), Exempt,Zero Rate, Out of Scope |
| VAT Registered(GCC) | GCC | Zero Rate |
| Non-VAT Registered (GCC) | UAE | Standard Rate (5%), Exempt,Zero Rate, Out of Scope |
| Non-VAT Registered(GCC) | GCC | Zero Rate |
Transactions within the GCC are subject to a zero-rated VAT if the customer is registered for VAT in their respective GCC country.
-
Sales Outside the GCC
Sales of goods and services to clients outside the GCC area have a zero-rated value-added tax.
| Customer Type: | Tax Treatment: |
| Non-GCC Customer | Zero Rate |
-
Sales Within UAE Designated Zones
All transactions that fall in designated zones are subject to variation based on the nature of goods and services performed.
| Customer Type | VAT Registered – Designated Zones | Non-VAT Registered – Designated Zones |
| Tax Treatment | Standard Rate (5%) VAT, Zero Rate VAT, Exempt VAT, or Out of Scope VAT | Standard Rate (5%) VAT, Zero Rate VAT, Exempt VAT, or Out of Scope VAT |
VAT on Purchase Transactions
VAT application on other purchases is dependent on the vendor's location and registration status. The following are the primary scenarios for purchase transactions:
-
Purchases from UAE Vendors
VAT treatment on purchases from vendors within the UAE:
| Vendor Type | Tax Treatment |
| VAT Registered | Standard Rate (5%), Zero Rate VAT, Exempt, Out of Scope, Domestic Reverse Charge |
| Non-VAT Registered | Out of Scope, Domestic Reverse Charge (Standard Rate and Accelerated Rate) |
-
Purchases from GCC Vendors
Associating VAT in some instances is different when purchasing from suppliers within the GCC regions as outlined below:
| Vendor Type: | GCC VAT Registered | GCC VAT Registered | GCC Non-VAT Registered |
| Tax Treatment: | Goods- Out of Scope, Reverse Charge at Domestic Standard Rate Charge | GCC VAT, Exempt, Out of Scope | Standards Out of Scope and Reverse Charge for Domestic Standard and Elevated VAT |
-
Purchases from Non-GCC Vendors
For transactions with vendors outside the GCC, VAT may not apply directly, but the reverse charge mechanism could be applicable depending on the circumstances:
| Vendor Type: | Tax Treatment: |
| Non-GCC Vendor | Out of Scope - Relieved of Obligation, Reverse Charge (with Standard Rate Charge, Zero Rate) |
-
Acquisition of Goods from UAE’s Preferred Zones
VAT treatment for acquisitions within designated zones varies, and in some cases, no VAT is applied.
| Vendor Type: | Tax Treatment: |
| Designated Zones with an Operating VAT Registration | Goods - Standard Rate (5%), Services - Exempt, or Zero Rate, Out of Scope |
Reverse Charge Mechanism
This method targets defined transactions where zero ratings goods imports and services were supplied. In this case, the output VAT is not charged, but the input tax is. This also relates to:
| Acquiring goods and services from Designated Zones registered suppliers | Imports from non-resident taxable persons | Input Goods of Exempt Suppliers Claim |
The business registered for tax purposes is entitled to claim the input VAT on goods deliveries incurred before the effective supplies were incurred. To qualify for VAT recovery:
| The procurement/purchase must relate to the VAT business activity | Valid tax invoices should be provided | The supplier should be registered for VAT |
Certain expenses, such as entertainment and non-business-related costs, are not eligible for VAT recovery.
VAT Returns Filing
Companies that registered for VAT must present VAT returns to the Federal Tax Authority (FTA) at regular intervals. Requirements include the following:
| Sales and purchase transactions | VAT collected and paid | Input VAT claimed | VAT payments |
Meeting deadlines with filing and payment ensures that one remains compliant and avoids penalties.
Common VAT Compliance Mistakes
Some of the mistakes that businesses and VAT registrants should take note of include the following:
| Failure to record exempt supplies and zero-rated supplies | Failure to utilize the reverse charge service | Failure to implement record keeping | Filing late or inaccurate VAT returns |
Conclusion
To effectively determine VAT taxability and to ensure compliance with VAT laws, businesses are advised to seek the expert services or premier Tax Consultants in UAE such as VAT Registration UAE. Contact us today and we shall be glad to assist you.